In a slack economic climate, small quoted companies are apt to feel the squeeze first, initially from customers and subsequently on the Stock Exchange. Small computer companies have the added disadvantage of being in the technology sector and therefore being labelled as doubly high risk. Share prices for these smaller firms have been falling recently for various reasons, not least of which is the influence – or lack of it of market makers, who are increasingly unwilling to take the shares of small companies onto their books. Those with healthy profit margins are less likely to be affected by the investment trend. Sage Group Plc is one such company, but Paul Walker, financial director, says that approaches from software firms seeking merger deals have increased over the last six months. Typically, those that contact the company are recently established, doing UKP200,000 to UKP2m in turnover and need to take advantage of a large marketing force and distribution network. Sage floated last December and its shares are doing very well, but this could be to do with their novelty value for the market makers. The group also gets 30% of its turnover from the stationery supply side of the business and is therefore less exposed to the decline in the computer industry. That decline has also contributed to lower share prices, and while this may not be good news for some of the firms involved, for others it could represent good invest-ment opportunities. At First Point Plc, formerly MBS, Owen Williams reckons that the alleged UK economic downturn is exaggerated in the computer industry as a whole, even though some of the smaller electronic firms that floated recently now find no liquidity in their stock and find themselves locked in. As a cash-rich company, First Point is able to take advantage of the situation. In May it aquired Extel from United News Plc. Williams reckons mergers and aquisitions to be an inevitable consequence of the current market, especially if the investment trend continues. Cap Gemini Sogeti SA, the aquisitive French software and services group that won the bidding for Hoskyns Group Plc and snapped up SD-Scicon Plc’s SCS Scientific Control System GmbH, acknowledges falling share prices, but maintains that its aquisiton policy and rate is unaffected by present conditions. Jacques Collin, head of corporate communications, says that recently Cap has seen more aquisition opportunities, in the shape of increasing merger enquiries from middle-sized firms. But he attributes this to the group’s increasing visibility rather market conditions. He sees the falling prices not as a long-term trend, but as a statement of today which may well change quite quickly.
Cap Gemini
The statement is an expression of the confusion over the future of data processing and increasing competition which he says has also created price moderation. Susan Leverett at Hoskyns, in process of becoming 70%-owned by Cap Gemini, also recognises the trend towards consolidation and Hoskyns too has had increasing acquisition enquiries from software firms over the last six months. Ms Leverett believes that the economic situation is forcing smaller companies to disappear into larger ones for protection and that technology shares are less in favour because price-earnings ratios, particularly for software companies, are falling. But she maintains that there are other factors too, primarily a return to core businesses in all sectors and a growing trend towards globalisation. This means that software houses have to be large enough to trade with global companies that require international partnerships with service and maintenance suppliers. Collin at Cap also believes the global-isation issue to be a driving force behind consolidation, coupled with the increasing cost of technical expertise for the software houses. Whether consolidation is a good thing is not the question, according to Collin, it is simply a necessary fact of life in the 1990s. Owen Williams at First Point reckons that it all depends which side of the fence you’re on. – Sonya McGilchrist$
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